The cholinergic innervation of the neocortex by afferent fibers originating in the nucleus basalis (NB) of the basal forebrain is implicated in modulating diverse neocortical functions including information processing, cortical plasticity, arousal and attention. To understand the physiological basis of these brain functions during cholinergic modulation, it is critical to identify the cortical circuit elements involved and define how their interactions contribute to cortical network dynamics. In this thesis, I present evidence showing how specific neuronal and glial cell types can be differentially modulated by acetylcholine (Ach), resulting in dynamic functional interactions during ACh-modulated information processing and cortical plasticity. Chapter 2 identifies somatostatin-expressing neurons as a dominant player in driving decorrelation and information processing through its intimate interactions with parvalbumin-expressing and pyramidal neurons. Chapter 3 highlights astrocytes and their interactions with pyramidal neurons as important drives for stimulus-specific cortical plasticity during cholinergic modulation. This is one of the earliest works that has mapped the functional role of distinct cell-types and their interactions to specific brain functions modulated by ACh, thereby setting the foundation for future studies to manipulate these specific functional interactions in both normal and diseased brains.